Thursday, May 17, 2007

How Secure is the Fortress (FIG)?

When fortress decided to go public in February, 2006, instantly millions of investors were able to invest in an instrument that has been reserved exclusively for the rich. A hedge fund is very similar to a mutual fund in that it is a pool of capital that is managed with the goal of beating the market. A hedge fund differentiates itself from a mutual fund in that the risks are much higher and the investment instruments are much more complex. So what are the benefits and disadvantages of investing in a publicly traded hedge fund one might ask? Well here you go..

1. Anyone can invest! Hedge funds, although not regulated by the SEC, have to abide by a few regulations including but not limited to accepting only accredited investors. This means that if you don’t earn a minimum amount of money annually and have a net worth of $1 million, along with a significant amount of investment knowledge you can not invest with the elite.
2. Easily redeemable. In a normal hedge fund you are usually required to keep your money invested for a set period of time, usually one year. Many hedge funds will also only allow investors to enter and exit the fund twice a year. This is done in order to minimize professional fees and maximize the management’s investment opportunities without having to exit positions early.
3. Great way to hedge yourself against your long positions. Hedge funds invest in many complex instruments that the normal investor may shy away from including, derivatives, options, and shorts. They will also leverage up aggressively going uncovered or “naked” on many positions. Although a hedge fund may not out perform a bull market it will usually greatly out perform in a bear market due to its ability to short on leverage.

1. There is only one public hedge fund. If you wanted to invest in oil you have numerous different options including ETF’s, Futures, Stocks, and Mutual Funds, but if you wanted to invest in a hedge fund Fortress is your only option. With no competition to pull comparisons it is very difficult to discern if you have made the best investment decision.
2. Fees, Fees, and more Fees! Hedge funds are notorious for charging huge fees including a fee for capital under management (usually around 1 percent annually), and a profits fee (usually 20%). This is why the “Forbes 400 Richest Americans” list is loaded with hedge fund managers. Most investors are willing to pay these outrageous fees because the fund is still producing 20-40% rate of returns.

So will a publicly traded hedge fund be able to produce the same type returns on capital as the privately held funds? A publicly traded hedge fund is going to have to deal with the effects of Sarbanes Oxley and other SEC regulations which will likely have a negative impact on the bottom line. Fortress announced its first quarter earnings this week which had fallen 50% due to professional fees involving its IPO. Fortress is trading today (5/17/2007) at $29.07 with a P/E ratio of 24. It appears the verdict is still out on this new investment instrument, but with more IPO's expected in the near future it will be interesting to watch what happens.

No comments: